Indian Rupee: Rupee vulnerability and rate path – MUFG

MUFG’s Michael Wan expects the Indian Rupee (INR) to remain weak, projecting USD/INR could move towards 98.00 and even 100.00 if the Iran conflict persists. MUFG’s baseline sees USD/INR trading between 95.00 and 96.00, with INR underperformance driven by weak capital inflows, a wider current account deficit, higher Oil prices and potential energy supply disruptions.

Rupee seen underperforming on multiple risks

"We continue to view the Indian Rupee as vulnerable across a range of scenarios on the Strait of Hormuz, with USD/INR likely moving towards 98.00 levels and even 100.00 is in sight if the conflict prolongs or escalates."

"Our expectation assumes a de-escalation and over here our baseline forecasts for USD/INR to trade between 95.00 to 96.00 implies INR weakening further against Asia and G10 FX including EUR, JPY and CNH."

"Overall, our forecast for INR underperformance is driven by a combination of weak capital inflows, a wider current account deficit with higher oil prices, and potential energy supply disruption from a prolonged conflict. Risks from a possible weak Southwest Monsoon and a "Super El-Nino", coupled with uncertainty around further increases in US yields also introduce meaningful left tail risks for INR."

"From a markets perspective we note that both the onshore INR OIS curve and FX forwards are already pricing in a fair amount of risk-premia. For instance, there is already more than 125bps of RBI rate hikes priced over the next 12 months, while 12-month USD/INR FX forwards are a touch below 100 at the time of writing. Nonetheless, until we get better clarity on oil prices and the Strait of Hormuz we think the current environment still favours buying on dips for USD/INR and paying on dips for INR rates in the near-term. Given current pricing we would recommend staying patient rather than chasing levels excessively."

"Overall, we think for these measures to have a durable impact on supporting INR they would need to improve the ease of doing business in India and ultimately improve long-term earnings prospects in India relative to other markets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)